Goldman Sachs warns on global economic slowdown

Saturday, July 3, 2010

By Paul Martin

Fresh fears over a global economic slowdown were raised on Saturday after Goldman Sachs’ chief economist warned that data from China and the US revealed that any recovery was facing a “challenging period” and that evidence from America was “troubling”.

As Britain enters a self-imposed period of austerity to deal with an historically large budget deficit, Jim O’Neill, one of the world’s foremost economists, said that events beyond our shores could pose more of a problem than any domestic economic problems.

Writing in The Sunday Telegraph, Mr O’Neill, head of global economic research at Goldman, said: “What is clear is that a persistently struggling US, in addition to a major disappointment in China, would not be good news for the rest of us.”

Mr O’Neill, the man who first identified the BRIC economies of Brazil, Russia, India and China as the future for global economic growth and who has previously been bullish on the recovery, goes on to pinpoint growth in China as the main concern for the global economy.

He does say, though, that the present slowdown in China is to be welcomed as long as it is controlled.

“If we are wrong (about estimates for growth in China) especially significantly, then the world will be a very challenged place, particularly for those living on self-imposed domestic austerity,” he said.

“What adds to the reality of this situation is that there appears to be growing evidence that China is slowing down.”

The warnings come just days after Goldman downgraded its forecast for GDP growth in China this year from 11.4pc to 10.1pc.

China is currently carrying out a difficult rebalancing operation of slowing its high speed economic growth without killing the global economic recovery.

While China is still growing, the outlook in the US is “distinctly chilly”, Mr O’Neill warns, and the country could be threatened by a period of deflation.

“Despite our global optimism of the past year, we have remained rather cautious about the US, expecting the past problems of housing excess and domestic savings weakness to plague domestic consumption for some time,” he writes.

“What is more troubling recently is that the housing market indicators have turned especially weak again.”

The other danger highlighted by Mr O’Neill is the concern that too many G20 economies undertaking austerity measures at the same time could reverse the global economy recovery.

His view mirrors concerns voiced by President Barack Obama at the recent G20 meeting when he wrote to other world leaders expressing worries about the speed of budget cuts.

“All G20 members tightening fiscal policy at the same time as the UK’s tough stance would make it hard to deliver on improving growth for all, or possibly any,” Mr O’Neill explains.

The gloomy outlook comes just days before the Bank of England’s Monetary Policy Committee meets to decide whether to raise interest rates. The expectation is that members will vote to leave interest rates on hold at 0.5pc on Thursday amid the mounting concerns of a double-dip global recession.

They are also expected to maintain its quantitative easing target at £200bn of asset purchases.

Unlike the US, the MPC has been grappling over recent months with the twin pressures of above-target inflation and the risk that the fragile recovery under way in the UK could be derailed.

Mervyn King, the Bank’s Governor, has already indicated that loose monetary policy will be required to offset the impact that the severe fiscal tightening announced in the Budget is likely to have on growth.

The British Chambers of Commerce (BCC) urged the MPC to maintain its ultra- loose monetary policy stance.

“While the recent tough Budget was an important step towards stabilising our public finances and protecting our credit rating, its scale and severity inevitably increases the danger of an economic setback,” said David Kern, chief economist at the BCC.

“Negative developments in the eurozone and signs of a slowdown in the US only add to the obstacles facing the UK economy.”

However, one member of the committee, Andrew Sentence, voted for a 0.25 percentage-point rise in interest rates at the June meeting, citing “resilient” inflation.

Mr Kern said: “We were disappointed and concerned that one MPC member voted for an interest rate increase at its last meeting. Raising interest rates too soon would be a major mistake.

“It would heighten threats of a major setback, which are particularly acute at this early stage of the recovery.”

Economists do not expect the MPC to increase rates in the immediate future.

“We expect the MPC will keep rates on hold until year end and hike only slowly in 2011, but they may have to act more aggressively if above-target inflation destabilises inflation expectations,” said Michael Saunders, economist at Citigroup.

Also on Thursday, data from the Office for National Statistics are expected to show manufacturing output and the broader industrial production measure both grew by 0.3pc in May, after falling 0.4pc in April.

There are fears, however, that recovery in the manufacturing sector could lose steam if depressed demand among Britain’s key trading partners in the US and Europe hits exports.

The latest trade data on Friday will give a snapshot of export levels in May. The trade in goods deficit is expected to narrow to £7bn, from £7.3bn in April.